Australia: Moore Stephens quarterly automotive update - Spring 2012

Last Updated: 3 November 2012

Welcome to the first edition of Moore Stephens' Automotive newsletter.

Released quarterly, each edition of the newsletter will keep you up-to-date with the key issues, releases and news within the industry.

Designed to inform and incite conversation, we encourage you to contact us directly if you would like to discuss any of the articles developed by the Moore Stephens automotive team.

We trust you will enjoy this publication and look forward to hearing from you.

GST On Holdback and Incentive Payments

A recent Administrative Appeals Tribunal decision and subsequent Australian Taxation Office (ATO) position means that you may be able to seek a refund of any GST remitted on incentive payments, received from franchisors.

How does GST apply?

For some time, one of the GST issues impacting the automotive industry has been the GST treatment of holdback payments and incentive payments. The treatment of holdback payments was clarified in 2008 by the decision in KAP Motors v FCT*. In that decision the Court held that KAP Motors was entitled to a refund of GST it had remitted on the holdback payments.

The Administrative Appeals has now clarified the treatment of various incentives payments in its decision in AP Group Ltd v FCT**. This decision has been commonly referred to as 'son of holdback' in the industry. Broadly, the Tribunal concluded as follows:

  • Fleet rebates were consideration for a supply to the customer and therefore subject to GST
  • Run-out model support payments were also consideration for a supply to the customer and therefore subject to GST
  • Transit/interest protection payments were not consideration for a supply to the manufacturer and therefore not subject to GST
  • Retail target incentive payments were not consideration for a supply to the customer, nor consideration for a supply to the manufacturer and therefore not subject to GST
  • Wholesale target incentive payments were not consideration for a supply to the manufacturer and therefore not subject to GST

With the Tribunal's decision we now have certainty going forward, subject to an appeal by either party.

The AP Group decision means that automotive retailers may have incorrectly remitted GST on certain incentive payments to the ATO. However, GST legislation places restrictions on your ability to seek a refund of that GST. First, you must notify the ATO within four years of paying the GST that you are entitled to a refund. Secondly, for payments made after 30 June 2008, the ATO need not refund the GST unless your overpayment is passed on to your customers. However, we have been advised the ATO will pay GST refunds in respect of certain incentive payments for this period after 30 June 2008 where the Dealer does not pass the GST refund on to their customers.

You may now be able to obtain a refund of GST you have remitted on certain incentive payments.

Should you wish to clarify your position or discuss the potential refund opportunity relating to the AP Group decision please contact the Moore Stephens Automotive team.

*[2008] FCA 159.
**[2012] AATA 409.

September Quarter Automotive Sales Update

The Automotive Industry has shown strong performance in terms of sales units for the 9 months to September 2012 with 882,674 units sold, up 9.4% from 2011. These results were driven by the various manufacturer discounting programs including Holden's "employee pricing program" and Mazda's "M day sale". Although sales units are increasing, it is at the expense of profitability due to the aggressive pricing strategies employed by the franchisors and dealers.

Both Mazda and Holden were notable movers during the month of September 2012 in comparison to September 2011. With Holden conceding 3.2% market share and Mazda gaining 3.7% led by its Mazda 3, the top selling car for the year to date.

Local car manufacturers consist of 12.4% of the market for the September quarter, slipping 2.8% to the imported car manufacturers. Mazda have been tough competition to Holden for the spot behind number one manufacturer Toyota while Hyundai have edged in front of Ford as the fourth ranked manufacturer in sales. A new importer for the September month was Opel with their range including the Astra, Insignia and Corsa, selling 100, 44 and 30 passenger cars respectively.

Although all market segments have achieved growth for the September quarter, it is evident that the trend towards SUV's is continuing with the segment showing the greatest growth of 28.9%. Whilst Toyota, Nissan and Subaru dominate this segment with 40.7% share, the largest growth was achieved by Skoda, Peugeot and Jeep.

Top Performers - September YTD

Top Selling Cars - Units

Mazda 3 32,434
Hilux 31,064
Corolla 28,089
Commodore 23,226
Cruze 22,891

Top Manufacturers - Market Share

Toyota 19.3%
Holden 10.4%
Mazda 9.5%
Hyundai 8.3%
Ford 8.0%

Selection of Major Movers - September YTD 2012 V September YTD 2011

Great Wall v200 4X4 5,269% (2,687 units)
Hyundai i40 1,330% (1,543 units)
Hyundai Accent 498% (4,687 units)
Volkswagen Amarok 4X4 215% (2,828 units)
Jeep Grand Cherokee 191% (3,820 units)
Toyota FJ Cruiser 173% (1,480 units)
Mazda CX-7 -53% (3,608 units)
Honda CRV -39% (1,730 units)
Mazda BT-50 4X2 -39% (1,628 units)
Holden Commodore -27% (8,751 units)

Didn't make it to AADA?

Key ideas to improve your bottom line without selling 1 more car...

Your balance sheet is often overlooked in reviewing your monthly dealership performance, given that the natural focus is on sales and gross profit.

However, you can achieve and sustain an improvement in your profitability if you incorporate a balance sheet review into your monthly performance meetings. Understanding the balance sheet and your financial structure enables you to understand where potential interest savings can be made.

Interest is typically the third biggest cost for most dealerships so an investment of time in this area can bring considerable financial reward. In any type of business, a lazy balance sheet can upset cash flow and trigger unnecessary interest costs.

This was 1 of the 4 profit improvement ideas workshopped by Brett Fowler (Moore Stephens automotive partner) at the recent AADA conference.

In reviewing your balance sheet and financial structure, some of the main focus areas that impact on interest costs are:

  • Cash and overdraft balances
  • Stock turnover
  • Debtor ageing and payment terms
  • Creditor ageing and payment terms
  • Floor plan and capital loan management
  • Finance terms

Specific ideas that were discussed include:

  • Identify. Sit down with your finance team and identify the strengths and weakness of your balance sheet.
  • Timely and regular reporting. Your finance team should report regularly (e.g. monthly) on aspects of the balance sheet that can be controlled, fluctuate regularly and will impact on your interest costs.
  • Accountability. Make your employees accountable for the areas of the balance sheet that they can control. For example, introduce KPIs for your finance team to speed collection of debtors. Improvement in debtor collection means extra cash to be offset against your finance facilities.
  • Accurate reporting. The information you base your finance decisions on needs to be accurate and reliable. Introduce a non-negotiable reconciliation process for all major liquidity balances.
  • Ask your finance provider for a better deal. Can a lower interest rate be negotiated? What hurdles can you jump through in order to lower your risk rating?
  • Daily sweep accounts. Are these in place?
  • Obtain interest on credit bank account balances.
  • Manage vehicle and parts stock levels. Is an ageing policy in place and adhered to? Does the current level of stock exceed expected customer demand? Has slow-moving stock been identified and moved on? Excess and slow-moving stock increases your floorplan interest and erodes your profitability.
  • Collection of franchisor holdback and bonuses. Does your finance team manage the reconciliation and approval process on an active and timely basis?
  • Type of finance. Can a less costly form of finance be obtained (e.g. capital loans versus bank overdraft facilities)?
  • Credit card surcharges. Have you considered passing the cost of merchant fees onto your customers, like other retailers in Australia?
  • Discipline. Reviewing your balance sheet should not be a one-off exercise. Long term interest savings and fluid cash flow can only be achieved by putting in place initiatives that become an integral part of your business.

Brett outlined in his presentation that having the discipline to review and take action on the financial structure within the balance sheet will substantially improve dealership profitability.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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